The association between corporate governance and earnings quality: Further evidence using the GOV-Score

Document Type

Article

Publication Date

12-1-2008

Abstract

This paper reexamines the relation between corporate governance and quality of earnings using a summary governance measure. Prior research has used many surrogates for corporate governance including size and composition of board of directors, existence and composition of audit committee, and extent of institutional ownership. However, the criticism of the extant research has been that corporate governance comprises many facets and is not uni-dimensional. In this study we fill this void by using the Gov-Score developed by Brown and Caylor [Brown, D., and Caylor, M.L., (2006). Corporate governance and firm valuation. Journal of Accounting and Public Policy 25, 409-434.] to measure corporate governance. In the post-Sarbanes-Oxley period, we find evidence of a significant inverse relationship, namely higher levels of corporate governance are associated with lower absolute discretionary accruals and higher quality of earnings. Furthermore, our results suggest that only firms in the highest category of corporate governance experience significantly improved quality of earnings. Finally, as a test of robustness, we document that corporate governance is negatively associated with small earnings surprises. This implies that firms with weak corporate governance are more likely to manage earnings in order to meet or beat analyst forecasts. © 2008 Elsevier B.V. All rights reserved.

Identifier

56749178635 (Scopus)

Publication Title

Advances in Accounting

External Full Text Location

https://doi.org/10.1016/j.adiac.2008.08.011

ISSN

08826110

First Page

191

Last Page

201

Issue

2

Volume

24

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